[Federal Register Volume 67, Number 222 (Monday, November 18, 2002)]
[Notices]
[Pages 69580-69592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29170]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46803; File No. SR-PCX-2002-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to the Exchange's New Trading Platform for Options, PCX Plus

November 8, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 27, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in items I, II, 
and III below, which items have been prepared by the PCX. On November 
6, 2002, the PCX filed amendment no. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces the PCX's original rule 19b-4 
filing in its entirety.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to adopt new rules for the implementation of its 
new trading platform for options, PCX Plus. The PCX's proposal includes 
new rules on priority and allocations of orders, rule changes to permit 
options Market Makers to conduct their trading activities from 
locations away from the trading floor, and proposed system changes to 
accommodate new order handling procedures and automated trade 
processing.
    The text of the proposed rule change is available at the Office of 
the Secretary, PCX, at the Commission, and on the Commission's website.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
item IV below. The PCX has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
a. Introduction
    The Exchange's new trading platform for options, PCX Plus, has been 
designed to enhance the PCX's current marketplace in several respects. 
The Exchange believes that this new hybrid model combines the best 
features of traditional floor-based markets and new electronic trading 
systems, while preserving a single marketplace with a single book. It 
allows PCX members to trade as Market Makers from locations away from 
the trading floor. It replaces the PCX's current priority rules with 
new ones that the Exchange believes would provide greater incentives 
for Market Makers to quote aggressively, with tighter markets and 
greater

[[Page 69581]]

liquidity. PCX Plus expands upon the Exchange's current trading rules 
by permitting the entry of eligible orders of all account types into 
the Exchange's Consolidated Book. The Exchange believes that the new 
trading platform would greatly enhance the PCX's options market by 
accommodating independent quotations from numerous market participants. 
Also, the Exchange represents that PCX Plus provides intermarket price 
protection and would operate in a manner consistent with the Options 
Intermarket Linkage Plan.\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (order approving Options 
Intermarket Linkage Plan submitted by American Stock Exchange LLC, 
Chicago Board Options Exchange, Inc. and International Securities 
Exchange LLC); 43574 (November 16, 2000), 65 FR 70850 (November 28, 
2000) (order approving the PCX as participant in Options Intermarket 
Linkage Plan); and 43573 (November 16, 2000), 65 FR 70851 (November 
28, 2000) (order approving Philadelphia Stock Exchange, Inc. as 
participant in Options Intermarket Linkage Plan).
---------------------------------------------------------------------------

    The Exchange believes that the proposed new PCX Plus rules would 
foster aggressive quote competition and would reward market 
participants who improve PCX quotes with deep and liquid markets. Under 
the proposal, orders would be allocated to Market Makers on a ``size 
pro rata'' basis. The Exchange believes that this formula would reward 
larger-sized bids and offers with greater participation in trades. In 
addition, the Exchange believes that the proposal would grant 
significant trade participation rights to market participants who are 
first to improve the PCX quote. Under this proposed rule change, a 
member who improves the quote and stands alone at that price for three 
seconds would receive First Improved Quote (``FIQ'') status. Those with 
FIQ status would be guaranteed, at least, the greater of: (1) 40% of 
the next order(s) to buy or sell the same series (for a minimum of 20 
contracts), or (2) the total size that it would receive pursuant to a 
size pro rata allocation. Market Makers must establish the best bid or 
offer (``BBO'') or quote at the BBO to participate in automated trades. 
As the Exchange phases in PCX Plus, the current Auto-Ex allocation 
methodology, involving Market Makers participating on a rotating 
``wheel,'' would be phased out and replaced with a new model in which 
each PCX Market Maker's trading interest would be independently 
generated and continuously represented in the Consolidated Book.
    Under the proposal, member firms would be able to effect crossing 
transactions on the Exchange in two different ways--either manually on 
the trading floor or electronically through PCX Plus. The Exchange 
represents that these proposed rules are designed to assure that no one 
market participant receives a disproportionate share of a transaction 
in relation to other market participants who are bidding or offering at 
the same price. The Exchange represents that the proposed rules are 
also designed to assure that market participants who display 
significant trading interest ``up front'' are rewarded with 
participation in the trade.
    The proposed new structure would involve four types of Market 
Makers on the Exchange: \5\
---------------------------------------------------------------------------

    \5\ See proposed PCX rule 6.32(a) (definition of ``Market 
Maker'').
---------------------------------------------------------------------------

    (1) Lead Market Makers (``LMMs'') would continue to provide two-
sided markets throughout the trading day, while conducting their 
trading activities on the trading floor of the Exchange; \6\
---------------------------------------------------------------------------

    \6\ LMMs will also be responsible for performing certain 
functions under the Options Intermarket Linkage Plan. See supra note 
4.
---------------------------------------------------------------------------

    (2) The Exchange would permit Remote Market Makers (``RMMs'') to 
enter quotes and effect trades from off-site locations. RMMs would be 
permitted to select their appointed issues;
    (3) Floor Market Makers (``FMMs''), who are registered Market 
Makers with basic obligations on the Options Floor, would continue to 
trade as they do today and would supply independently generated Quotes 
with Size; \7\ and
---------------------------------------------------------------------------

    \7\ See proposed PCX rule 6.1(b)(33) (which defines ``Quote with 
Size'' as a quotation to buy or sell a specific number of option 
contracts at a specific price that a Market Maker has entered into 
PCX Plus through an electronic interface).
---------------------------------------------------------------------------

    (4) The Exchange would permit members to act as Supplemental Market 
Makers (``SMMs''), who would be provided with tools that allow them to 
add liquidity at the same price that is then being disseminated by the 
LMM.
    The Exchange believes that the aggregation of quotes from Market 
Makers on and off the trading floor would result in greater liquidity 
and narrower bid-ask spreads for all market participants. The Exchange 
also notes that the proposed changes to its rules are non-
discriminatory in that they would permit all Market Makers to submit 
their quotations via their own proprietary auto-quoting devices if they 
choose to do so.
    The Exchange believes that the proposed new PCX Plus rules are 
designed to assure fair trade allocation among market participants. 
LMMs would be eligible to receive up to 40% in guaranteed participation 
on trades occurring at their disseminated markets. Members would also 
be entitled to receive up to 40% trade participation if they maintain 
FIQ status. Although members may receive more than 40% participation by 
virtue of a pro rata allocation, no member would be eligible to receive 
more than 40% participation as a guarantee by rule. The proposal is 
also designed to assure that firms interacting with their customers' 
orders would receive no more than a 40% share of such orders before the 
orders are exposed to further competition. Finally, no member would be 
allocated option contracts in excess of their expressed trading 
interest.
    The Exchange represents that PCX Plus has been designed so that 
available trading interest on the Exchange can be aggregated by price 
and size, both of which would be displayed promptly. Currently, only 
orders for the accounts of Public Customers are eligible to be 
represented in the PCX order book. Under the proposal, orders for all 
account types `` including Public Customer, Firm, Market Maker and Non-
Member Market Maker--may be represented in the Consolidated Book, along 
with Quotes with Size of PCX Market Makers (which would be entered for 
handling as if they were orders). Public Customer orders displayed at 
the best price would continue to receive first priority on the 
Exchange.\8\
---------------------------------------------------------------------------

    \8\ Under the proposal, inbound orders are allocated based on 
the following priority sequence: Public Customer orders have first 
priority to trade against such orders; quotes with FIQ status have 
second priority (subject to a 40% cap); the portion of the order 
subject to LMM guaranteed participation will be allocated next; 
followed by any trading interest for the accounts of non-Public 
Customers. See proposed PCX rule 6.76(a).
---------------------------------------------------------------------------

    Market and marketable limit orders routed electronically to PCX 
Plus would receive immediate executions against bids and offers in the 
Consolidated Book, unless a specified condition applies, in which case 
the order (or a portion of it) would be routed to a Floor Broker Hand 
Held Terminal for execution. The order execution rules and automated 
processes set forth in proposed PCX rule 6.76 are designed to place 
limitations on the internalization of order flow while providing added 
opportunities for competition. The Exchange believes that the proposed 
order execution rules and automated processes would enhance market 
efficiency and fairness by offering incentives to all market 
participants who provide liquidity on the Exchange.
    The proposal also establishes new procedures for Market Makers' 
trading interest that interact electronically with orders in the 
Consolidated Book. In such situations, a Market Maker who initiates a 
transaction would be limited

[[Page 69582]]

to 40% of the available customer contracts at the execution price or 
the Market Maker's size pro rata share, whichever amount is greater. 
The Market Maker would then be eligible to trade the remaining option 
contracts at the execution price once other Crowd Participants \9\ have 
had an opportunity to participate.
---------------------------------------------------------------------------

    \9\ See proposed PCX rule 6.1(b)(38) (which defines ``Crowd 
Participants'' as the Market Makers appointed to an option issue 
under rule 6.35, and any Floor Brokers actively representing orders 
at the best bid or offer on the Exchange for a particular option 
series.)
---------------------------------------------------------------------------

    While the proposal is intended to further automate options trading 
on the Exchange, the Exchange represents that the proposed new system 
would continue to facilitate open outcry trading as currently practiced 
today, particularly for large transactions and executions of complex 
orders and contingency orders. When an order is entered by phone or re-
routed to a Hand Held Terminal for execution, a Floor Broker would 
represent it at the appropriate trading post and would afford priority 
first to Public Customer interest in the Consolidated Book, then to 
bids or offers in the trading crowd, and finally to any Firm or Market 
Maker interest in the Consolidated Book.\10\
---------------------------------------------------------------------------

    \10\ See proposed PCX rule 6.76(d).
---------------------------------------------------------------------------

    The Exchange proposes to phase in the use of PCX Plus in particular 
issues, while simultaneously phasing out the current Auto-Ex ``wheel'' 
functionality. During the phase-in period, the Exchange represents that 
it would have two sets of trading rules in operation, each applying to 
a different set of option issues traded on the Exchange.
    The PCX believes that the proposed rule change would promote 
efficiency by reducing the costs associated with transactions on the 
Exchange, and would promote liquidity and competition on the Exchange 
by permitting Market Makers to independently make markets either on or 
off of the PCX's physical trading floor. By allowing PCX Market Makers 
to conduct their activities off the Options Floor, while retaining the 
availability of on-floor market making, the Exchange believes that the 
proposal would permit PCX Market Makers to choose the most efficient 
and cost-effective way to conduct their businesses. The Exchange 
believes that the proposal is also designed to assure that the Exchange 
would attract greater liquidity and improved pricing, thereby making 
the PCX a more competitive market for all investors.
b. Summary of Proposed Change to PCX's Rules
i. PCX Rule 4. General Rules
    The Exchange proposes to modify its general rules in PCX rule 4 as 
follows:
    Proposed PCX Rule 4.2--RMMs trading from a location off the Options 
Floor are subject to the same prohibitions against trading prior to the 
official opening of the PCX for options trading.
    Proposed PCX Rule 4.2, Commentary .01--This proposed rule change 
permits RMMs to effect transactions through the facilities of the 
Exchange until 1:02 p.m. (PST) for equity options and until 1:15 p.m. 
(PST) for index options on each business day.
ii. PCX Rule 6.1. Applicability, Definitions and References
    In connection with the implementation of PCX Plus, the Exchange 
proposes to adopt the following definitions:
    Proposed PCX Rule 6.1(b)(33)--The term ``Quote with Size'' means a 
quotation to buy or sell a specific number of option contracts at a 
specific price that a Market Maker has entered into PCX Plus through an 
electronic interface.
    Proposed PCX Rule 6.1(b)(35)--The term ``Non-Member Market Maker'' 
includes, but is not limited to, specialists, designated primary market 
makers, lead market makers, market makers, registered options traders, 
primary market makers, and competitive market makers registered on an 
exchange other than the PCX.
    Proposed PCX Rule 6.1(b)(36)--The term ``Firm'' means a broker-
dealer that is not registered as a dealer-specialist or market maker on 
a registered national securities exchange or association.
    Proposed PCX Rule 6.1(b)(37)--The term ``Consolidated Book'' means 
the Exchange's electronic book of limit orders for the accounts of 
Public Customers and broker-dealers, and Quotes with Size. The Exchange 
represents that all orders and Quotes with Size that are entered into 
the Consolidated Book would be ranked and maintained in accordance with 
the rules of priority as provided in proposed PCX rule 6.76.
    Proposed PCX Rule 6.1(b)(38)--The term ``Crowd Participants,'' 
means the Market Makers appointed to an option issue under PCX Rule 
6.35, and any Floor Brokers actively representing orders at the best 
bid or offer on the Exchange for a particular option series.
    Proposed PCX Rule 6.1(c)(2)--For purposes of the PCX rules, the 
term ``Market Maker'' includes LMMs, RMMs, SMMs, and FMMs, unless the 
context otherwise indicates.
iii. Fast Markets and Unusual Conditions
    Proposed PCX Rule 6.28(c)(6)--This proposed rule change provides 
that the PCX Plus execution mechanism as set forth in proposed PCX rule 
6.76(b) may be suspended for a period of time not to exceed 5 minutes 
because of an influx of orders or other unusual market conditions.
iv. Market Makers
    Proposed PCX Rule 6.32(a)--The proposed rule change specifies that 
an RMM whose transactions are executed through the facilities of the 
Exchange would be deemed to be a ``Market Maker'' for all purposes 
under the Act and the rules and regulations thereunder.
    PCX Market Makers would be one of the following types: LMM, RMM, 
SMM, or a FMM. Each type of Market Maker is defined in the following 
subsections:
    Proposed PCX Rule 6.32(a)(1)--An LMM is a registered Market Maker 
who makes transactions as a dealer-specialist while on the Floor of the 
Exchange and who meets the qualification requirements of PCX rule 
6.82(b).
    Proposed PCX Rule 6.32(a)(2)--An RMM is an individual who is 
registered with the Exchange for the purpose of making transactions as 
dealer-specialist from a location off the Floor of the Exchange. An RMM 
may also execute transactions while on the Floor of the Exchange. 
Transactions of an RMM that are executed through the facilities of the 
Exchange are deemed to be Market Maker transactions for purposes of PCX 
rule 6.32.
    Proposed PCX Rule 6.32(a)(3)--An SMM is a registered Market Maker 
who makes transactions as a dealer-specialist while on the Floor of the 
Exchange and who provides quotations:
    (A) Manually, by public outcry; or
    (B) Automatically, through an electronic interface device at the 
LMM's prevailing bid or offering price, with a size to be designated by 
the SMM.
    Proposed PCX Rule 6.32(a)(4)--A FMM is a registered Market Maker 
who makes transactions as a dealer-specialist while on the Floor of the 
Exchange and provides quotations:
    (A) Manually, by public outcry; or
    (B) Automatically through a proprietary auto quoting device.
    Proposed PCX Rule 6.32(b)--This proposed rule change provides that 
those transactions initiated by RMMs through the facilities of the 
Exchange, as well as those initiated on the Options Floor, would count 
as Market Maker

[[Page 69583]]

transactions and be entitled to special margin treatment, pursuant to 
the net capital requirements of rule 15c3-1 under the Act and 
Regulation T of the Board of Governors of the Federal Reserve 
system.\11\
---------------------------------------------------------------------------

    \11\ This proposed rule change also provides that transactions 
entered from off the Options Floor, except those executed for the 
account of an RMM and those that are permissible under proposed PCX 
rule 6.32(c), must be placed in the Market Maker's investment 
account and be subject to applicable customer margin.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.32(c)--RMMs may enter opening orders from off 
the Options Floor for execution by a Floor Broker and receive special 
margin treatment for them as long as the entry of such orders is 
consistent with the RMM's duty to maintain fair and orderly markets, 
and such orders are entered for the purpose of hedging, reducing the 
risk of, or rebalancing open positions of the RMM.
    Proposed PCX Rule 6.34, Commentary .01--This proposed rule change 
clarifies that a Floor Broker, unless otherwise prohibited in this PCX 
rule or PCX rules 6.38 or 6.52(a),\12\ may enter an order for its 
proprietary account in the Consolidated Book for the purpose of 
liquidating a position resulting from a bona fide error made in the 
course of its floor brokerage business.
---------------------------------------------------------------------------

    \12\ Pursuant to PCX rule 6.52(a), the Exchange will determine, 
on an issue-by-issue basis, the account types of orders that will be 
placed in the Consolidated Book. Such orders may include limit 
orders for the accounts of Public Customers, broker-dealers or 
Market Makers.
---------------------------------------------------------------------------

v. Appointment of Market Makers
    Proposed PCX Rule 6.35(g)(1)--Each RMM must select a primary 
appointment comprising a maximum number of option issues per seat. RMMs 
may select from among any option issues traded on the Exchange for 
inclusion in their primary appointments, which must be approved by the 
Options Allocation Committee (``OAC''). In considering the approval of 
the appointment of an RMM in each security, the OAC would consider:
    (A) The financial resources available to the RMM;
    (B) The RMM's experience, expertise and past performance in making 
markets, including the RMM's performance in other securities;
    (C) The RMM's operational capability; and
    (D) The maintenance and enhancement of competition among Market 
Makers in each security in which they are appointed.
    Proposed PCX Rule 6.35(g)(2)--Except as provided in proposed PCX 
rule 6.35(h), the following rules apply to the primary appointments of 
RMMs:
    (A) RMMs with a single seat may have up to eight option issues 
within their primary appointments.
    (B) RMMs with two seats may have up to 18 option issues within 
their primary appointments.
    (C) RMMs with three seats may have up to 30 option issues within 
their primary appointments.
    (D) RMMs with four seats may have up to 44 option issues within 
their primary appointments.
    (E) RMMs with five seats may have up to 60 option issues within 
their primary appointments.
    (F) RMMs with six seats may have up to 78 option issues within 
their primary appointments.
    (G) RMMs with seven seats may have up to 98 option issues within 
their primary appointment zones.
    (H) RMMs with eight seats may have up to 120 option issues within 
their primary appointments.
    The Options Floor Trading Committee would determine uniform limits 
on the number of issues applicable to RMMs with more than eight seats.
    Proposed PCX Rule 6.35(g)(3)--RMMs may change the option issues 
that are included in their primary appointments, subject to the 
approval of the OAC. Such requests must be made in a form and manner 
prescribed by the Exchange. In considering whether to approve an RMM's 
request to change their primary appointments, the OAC would consider 
the factors set forth in proposed PCX rule 6.35(g)(1).
    Proposed PCX Rule 6.35(g)(4)--RMMs may withdraw from trading an 
option issue that is within their primary appointments by providing the 
Exchange with a three-business day written notice of such withdrawal. 
RMMs who fail to give advance written notice of withdrawal to the 
Exchange may be subject to formal disciplinary action pursuant to PCX 
rule 10. Subsequent to withdrawal, the RMM may not be re-appointed as 
an RMM in that option issue for a period of one full calendar quarter.
    Proposed PCX Rule 6.35(g)(5)--This proposed rule change provides 
that the Exchange may suspend or terminate any appointment of an RMM in 
one or more option issues whenever, in the Exchange's judgment, the 
interests of maintaining a fair and orderly market are best served by 
such action.
    Proposed PCX Rule 6.35(g)(6)--An RMM may seek review of any action 
taken by the Exchange pursuant to subsection (g), including the denial 
of the appointment for, or the termination or suspension of, an RMM's 
appointment in an option issue or issues, in accordance with PCX rule 
10 or 11, as applicable.
    Proposed PCX Rule 6.35(h)--This proposed rule change provides that 
a Member Firm acting as an LMM firm may trade up to four issues as an 
RMM. These four issues are not required to be located at posts that are 
contiguous with the existing primary appointments of the Member Firm's 
individual Members. The LMM may enter quotations electronically in such 
issues from a location away from the trading post.
vi. Letters of Guarantee
    Proposed PCX Rule 6.36(a)--This proposed rule change provides that 
RMMs must have a Letter of Guarantee that has been issued for such 
members by a Clearing Member and approved by the Options Clearing 
Corporation and the Exchange in order to effect transactions through 
the facilities of the Exchange. This requirement is the same for all 
other types of Market Makers effecting transactions on the Options 
Floor.
vii. Quoting Obligations of Market Makers
    Proposed PCX Rule 6.37, Commentary .07--Former PCX rule 6.37, 
Commentary .07 is being renumbered as new proposed PCX rule 6.37(d).
    Proposed PCX Rule 6.37(g)(1)--This proposed rule change sets forth 
the quoting obligations of LMMs. Specifically, LMMs must provide 
continuous two-sided quotations that meet the legal quote width 
requirements of PCX rule 6.37(b) throughout the trading day in each of 
their appointed issues. LMMs must also specify a size for each of their 
quotations applicable to:
    (A) Orders for Public Customers; and
    (B) Orders and Quotes with Size for broker-dealers.
    LMMs must enter their quotations through an electronic interface 
with the Exchange, but may also provide quotations by public outcry.
    Proposed PCX Rule 6.37(g)(2)--This proposed rule change sets forth 
a requirement that RMMs must provide continuous two-sided quotations in 
each issue in which they are appointed during 60% of all times during 
which the Exchange is open for options trading. Such quotations must 
meet the legal width requirements of PCX rule 6.37(b). In addition, 
RMMs must specify a size for each of their quotations applicable to:
    (A) Orders for Public Customers; and
    (B) Orders and Quotes with Size for broker-dealers.
    These obligations would apply to all of the RMM's appointed issues

[[Page 69584]]

collectively, rather than on an issue-by-issue basis. Compliance with 
these obligations would be determined on a per-calendar-quarter basis. 
RMMs must enter all of their quotations through an electronic interface 
with the Exchange. Finally, the public outcry requirements of PCX rule 
6.73 do not apply to RMMs.
    Proposed PCX Rule 6.37(g)(3)--SMMs must provide the sizes of their 
quotations through an electronic interface with the Exchange, but may 
also provide quotations by public outcry.
    Proposed PCX Rule 6.37(g)(4)--This proposed rule change provides 
that FMMs must provide quotations in accordance with PCX rule 6.37 
(which sets forth basic obligations of Market Makers) and may enter 
such quotations by public outcry or through an electronic interface 
with the Exchange.
viii. Obligations of RMMs
    Proposed PCX Rule 6.37(h)(1)--This proposed rule change indicates 
that all PCX rules applicable to Market Makers would also apply to RMMs 
unless otherwise provided or unless the context clearly indicates 
otherwise. The following PCX rules do not apply to RMMs who are not 
present on the Options Floor: PCX rule 6.2(b)-(f) and (h) (Admission to 
and Conduct on the Options Trading Floor); PCX rule 6.35(a) 
(Appointment of Market Makers); PCX rule 6.37(d) and Commentaries .03 
and .05 (Obligations of Market Makers); PCX rule 6.53, Commentary .01 
(Issuing a Call for Market Makers); PCX rule 6.66 (Order 
Identification); PCX rule 6.73 (Manner of Bidding and Offering); PCX 
rule 6.74 (Bid and Offers in Relation to Units of Trading); and PCX 
rule 6.100 (Evaluation of Options Trading Crowd Performance).
    Proposed PCX Rule 6.37(h)(2)--This proposed rule change provides 
that, for the purposes of the following rules, RMMs are deemed not to 
be members of the trading crowd: PCX rule 6.8, Commentary .08(c)(2) 
(the firm facilitation exemption procedures relating to position 
limits); PCX rule 6.47(a)-(f) (Crossing Orders and Stock/Option 
Orders); and PCX rule 6.66 (trading crowd participants to whom order 
identification information must be provided).
    Proposed PCX Rule 6.37(h)(3)--Under this proposed rule change, each 
RMM must meet its quoting obligations as set forth in proposed PCX rule 
6.37(g). Failure to comply with the 60% quoting requirement may result 
in a fine pursuant to PCX rule 10.13; however, if aggravating 
circumstances are present, formal disciplinary action may be taken 
pursuant to PCX rule 10.4. The Exchange may consider exceptions to this 
quoting requirement based on demonstrated legal or regulatory 
requirements or other mitigating circumstances (e.g., excused leaves of 
absence, personal emergencies, or equipment problems).
    Proposed PCX Rule 6.37(h)(4)--This proposed new rule provides that 
an RMM may be called upon by an Exchange official designated by the 
Board of Governors to submit a single quote or maintain continuous 
quotes in one or more series of an option issue to which the RMM is 
appointed whenever, in the judgment of such official, it is necessary 
to do so in the interest of maintaining fair and orderly markets.
    Proposed PCX Rule 6.37(h)(5)--Under this proposed rule change, RMMs 
must trade at least 75% of their average daily trading volume per 
quarter in issues included in their primary appointments pursuant to 
proposed PCX rule 6.35(g). RMMs may trade up to 25% of their quarterly 
contract volume in option issues that are not included within their 
primary appointments.
    Proposed PCX Rule 6.37(h)(6)--If the Exchange finds any failure by 
an RMM to engage in a course of dealings as specified in subsections 
(3)-(5) of this PCX rule, such RMM would be subject to disciplinary 
action or suspension or revocation of registration by the Exchange in 
one or more of the option issues in which the RMM holds a primary 
appointment. Nothing in this proposed rule change would limit any other 
power of the Board of Governors under the Constitution, rules, or 
procedures of the Exchange with respect to the registration of an RMM 
or with respect to any violation by an RMM of the provisions of this 
PCX rule.
    Proposed PCX Rule 6.37(h)(7)--This proposed rule change establishes 
procedures for evaluating the performance of RMMs. Under the proposal, 
the OAC would periodically conduct an evaluation of RMMs to determine 
whether they have fulfilled performance standards relating to, among 
other things, quality of markets, competition among Market Makers, 
observance of ethical standards, and administrative factors. The OAC 
would consider any relevant information including, but not limited to, 
the results of an RMM evaluation, trading data, an RMM's regulatory 
history and such other factors and data as may be pertinent in the 
circumstances.
    If the OAC finds any failure by an RMM to meet minimum performance 
standards, the OAC would be permitted to take the following actions, 
after written notice and after opportunity for hearing pursuant to PCX 
rule 11: (i) Restriction of appointments to additional option issues in 
the RMM's primary appointment; (ii) suspension, termination, or 
restriction of an appointment in one or more option issues; or (iii) 
suspension, termination, or restriction of the RMM's registration in 
general.
    Pursuant to the proposal, if an RMM's appointment in an option 
issue or issues has been terminated pursuant to this subsection (7) of 
this PCX rule, the RMM may not be re-appointed as an RMM in that option 
issue or issues for a period not to exceed six months.
    Proposed PCX Rule 6.37, Commentary .03--This proposed rule change 
clarifies that the obligations set forth in PCX rule 6.37 (regarding 
the removal of bids and offers) do not apply to RMMs. Under the 
proposed rule change, when a Market Maker, other than an RMM, displays 
a market on the screen that is the best market in that crowd, the 
Market Maker is obligated to ensure that the Market Maker's market is 
removed from the screen when the Market Maker leaves the crowd.
    Proposed PCX Rule 6.37, Commentary .07(a)--An RMM would be 
permitted to request a leave of absence when he or she seeks to 
withdraw temporarily from entering quotations into the PCX Plus system 
for periods in excess of two weeks.
    Proposed PCX Rule 6.37, Commentary .07(c)--This proposed rule 
change provides that RMMs, while on leave, may not enter opening 
transactions in Exchange listed options, in their Market Maker 
accounts, through the use of Floor Brokers, except as provided in 
proposed PCX rule 6.32(c).
viii. Restrictions on Acting as Market Maker and Floor Broker
    Proposed PCX Rule 6.38(a)(1)--This proposed rule change clarifies 
that the restrictions set forth in subsection (b) of PCX rule 6.38 
(relating to members acting as both Market Maker and Floor Broker) do 
not apply to LMMs who are performing the functions of Floor Brokers 
pursuant to PCX rule 6.82(h)(3).
    Proposed PCX Rule 6.38(a)(2)--This proposed rule change provides 
that RMMs, trading from a location off the Floor of the Exchange, are 
not eligible to perform the functions of the Floor Brokers.
ix. Consolidated Book
    The Exchange represents that, in PCX Plus, the Consolidated Book 
would be opened up to accept not only customer orders, but also broker-
dealer orders, Market Maker orders and Market Maker Quotes with Size. 
All orders and Quotes with Size at the best price would be

[[Page 69585]]

aggregated and disseminated via the Options Price Reporting Authority 
(``OPRA'').
    Proposed PCX Rule 6.52(a)--This proposed rule change states that 
the Exchange would determine, on an issue-by-issue basis, the account 
types of orders that would be placed in the Consolidated Book. Such 
orders may include limit orders for the accounts of Public Customers, 
broker-dealers or Market Makers. In addition, Quotes with Size of 
Market Makers would be permitted to be included in the Consolidated 
Book. There would be no limit to the size of orders or quotes that may 
be entered into the Consolidated Book. The Exchange would determine 
whether any or all types of contingency orders (as defined in PCX rule 
6.62(c)) would be eligible to be included in the Consolidated Book.\13\ 
The Exchange, with the approval of the Options Floor Trading Committee, 
would determine the types of contingency orders that would be eligible 
for entry into the Consolidated Book and would periodically issue 
bulletins to notify its Members which contingency orders would be 
permitted.
---------------------------------------------------------------------------

    \13\ The Exchange proposes to delete current PCX rule 6.52(a), 
which addresses the account types of orders eligible for acceptance 
and entry into the Order Book. Under the current PCX rule, only non-
broker-dealer customer orders may be placed with an Order Book 
Official.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.52(c)--Members submitting orders or Quotes with 
Size to the Order Book Official for execution or for entry into the 
Consolidated Book would be required to comply with such procedures and 
format requirements as may be prescribed by the Exchange.\14\
---------------------------------------------------------------------------

    \14\ The Exchange proposes to delete current PCX rule 6.52(c), 
which describes the circumstances and procedures to be followed by 
Floor Brokers for the entry, cancellation and changes of orders held 
by the Order Book Official.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.57--The Exchange proposes to renumber current 
PCX rule 6.57 as PCX rule 6.57(b), and to apply it to option issues not 
traded under PCX Plus during the phase-in period (proposed PCX rule 
6.57(a) is an explanatory preface). During the phase-in period, 
proposed new PCX rule 6.57(c) would apply to those issues traded on PCX 
Plus, and would require that all Crowd Participants be able to access 
at the same time the same information in regard to orders and Quotes 
with Size placed through PCX Plus.
x. Automated Opening Rotations
    The Exchange currently conducts Automated Opening Rotations 
(``AORs'') pursuant to PCX Rule 6.64(c). Under this PCX rule, only 
Public Customer orders are eligible to participate in AORs. If a 
broker-dealer order is eligible to trade at the opening, the applicable 
series is opened manually, pursuant to PCX rule 6.64(b). The Exchange 
now proposes to expand the account types of orders eligible for 
participation in an AOR to include orders for the accounts of broker-
dealers and Quotes with Size.\15\ Accordingly, the Exchange proposes to 
phase in its new proposed PCX rule 6.64(d) on Enhanced Automated 
Opening Rotations (which would accommodate broker-dealer orders) while 
simultaneously phasing out the existing AOR process pursuant to PCX 
rule 6.64(c).
---------------------------------------------------------------------------

    \15\ The Exchange represents that the Commission has previously 
expressed a view that the Exchange should modify AOR to accommodate 
broker-dealer orders in the automated opening process. See 
Securities Exchange Act Release No. 41970 (September 30, 1999), 64 
FR 54713 (October 7, 1999). The Exchange believes this proposed rule 
change is responsive to the Commission's concern.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.64(c)--This proposed rule change states that 
the Exchange would designate option issues that are eligible for 
automated opening rotations pursuant to this PCX rule and proposed PCX 
rule 6.64(d) (``Enhanced Automated Opening Rotations''). If an option 
series has not been designated as eligible for AOR pursuant to proposed 
PCX rule 6.64(d), and if that series is not opened automatically 
pursuant to PCX rule 6.64(c), then that series would be opened manually 
pursuant to PCX rule 6.64(b).
    Proposed PCX Rule 6.64(d)--This proposed rule change sets forth the 
manner in which AOR would operate in those options issues designated 
for trading in PCX Plus.
    Proposed PCX Rule 6.64(d)(1)--``Establishing a Market for the 
Opening Rotation.'' This proposed rule change sets forth the method for 
establishing a market for the opening rotation. Prior to the opening 
rotation in a particular option series, the Order Book Official would 
determine whether there are any manual orders being represented in the 
trading crowd to be executed during the opening rotation and would 
designate the option series in which there are such orders for manual 
opening. In doing so, the Order Book Official would call for bids and 
offers from the trading crowd once the underlying security has opened. 
The trading crowd may determine that the bids and offers then being 
displayed on the overhead screens are accurate, or alternatively, may 
modify those bids and offers by public outcry.
    Proposed PCX Rule 6.64(d)(2)--``Designating Series that are Not 
Eligible for the Automated Opening Rotation.'' Under this proposed rule 
change, the Order Book Official must identify, prior to the opening, 
all option series that are not eligible for the AOR and that would be 
opened manually. The Exchange would provide Crowd Participants with 
notice of those options series that would be opened manually. The 
series that are not eligible for the AOR include:
    (A) Series for which there are no market or marketable limit orders 
in PCX Plus.
    (B) Series for which there are one or more manual orders being 
represented in the trading crowd that are likely to be executed during 
the opening rotation, as determined by an Order Book Official.
    (C) Series for which one or more members of the trading crowd has 
reasonably requested that a manual opening rotation be conducted. Two 
Floor Officials may deny member requests for manual opening rotations 
in the absence of reasonable justification for doing so.
    (D) Series in which the ``imbalance threshold'' has been exceeded. 
Prior to the opening, the Order Book Official, in conjunction with the 
LMM in the issue, would set for each option issue a number of contracts 
that constitutes an imbalance threshold, i.e., a specific number of 
option contracts to buy in excess of the number of contracts to sell or 
a specific number of contracts to sell in excess of the number of 
contracts to buy. The Exchange represents that PCX Plus would not 
automatically open any series with an imbalance exceeding the threshold 
for that issue.
    Proposed PCX Rule 6.64(d)(3)--This proposed rule change states that 
series eligible for AOR would be opened automatically based on the 
following principles and procedures. First, PCX Plus would verify that 
a Quote with Size has been received from the LMM before a series is 
eligible for AOR. Second, PCX Plus would determine a single price at 
which a particular option series would be opened, as provided in 
Commentary .01 to this PCX rule. Third, orders in the PCX Plus system 
would maintain priority over Market Maker bids and offers that are not 
being represented in the Consolidated Book as Quotes with Size. Orders 
in the PCX Plus system would be matched up with one another, based on 
the priority rules as set forth in proposed PCX rule 6.76(a); provided, 
however, that: (i) Market Maker Quotes with Size would have priority 
over orders for Firms, Market Makers, and Non-Member Market Makers 
during the AOR, and (ii) orders for the accounts of Firms, Market 
Makers, and Non-Member Market Makers would be executed based on price/
time priority. Finally, following the opening, any unexecuted

[[Page 69586]]

contracts would be represented as bids and offers on the Exchange.
    Proposed PCX Rule 6.64(d)(4)--This proposed rule change states that 
contingency orders would not be entitled to participate in the AOR.
xi. Manner of Bidding and Offering
    Proposed PCX Rule 6.73--This proposed rule change provides that to 
be effective, a bid or offer must either be represented electronically 
in the Consolidated Book or be made by public outcry at the trading 
post where the option is traded. This PCX rule previously stated that 
to be effective, a bid or offer must be made by public outcry at the 
trading post where the option is traded.
xii. Priority Rules
    The Exchange's priority rules for options trading are currently set 
forth in PCX rule 6.75. Proposed rule 6.75(h) has been renumbered from 
former rule 6.76 and does not apply to PCX Plus Executions. Once PCX 
Plus has been completely phased-in, the PCX intends to submit a filing 
to delete this provision, along with the remainder of rule 6.75, as it 
would no longer be necessary.
    Proposed PCX Rule 6.75(d)--This proposed rule change clarifies that 
PCX rules 6.75(a)-(c), relating to priority, would only apply in 
connection with manual opening rotations.
    Proposed PCX Rule 6.76--This proposed rule change sets forth the 
priority and allocation procedures of orders and Quotes with Size for 
option issues designated to be traded in PCX Plus. The proposed rule 
change also provides that the maximum size of an inbound order that may 
be eligible for execution on PCX Plus (the ``Maximum Order Size'') 
pursuant to proposed PCX rule 6.76(b) below would be established by the 
LMM in the issue, subject to the approval of two Floor Officials,\16\ 
whose approval must be further ratified by the Options Floor Trading 
Committee.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 45930 (May 15, 
2002), 67 FR 36281 (May 23, 2002) (order approving file no. SR-PCX-
2001-13).
---------------------------------------------------------------------------

    Proposed PCX Rule 6.76(a)(1)--This proposed rule change states that 
the highest bid has priority over all other bids; and the lowest offer 
has priority over all other offers.
    Proposed PCX Rule 6.76(a)(2)--This proposed rule change states that 
multiple bids or offers at the same price are afforded priority based 
on account type and other principles, as set forth below:
    (A) Public Customer Orders. First, bids and offers in the 
Consolidated Book for Public Customer accounts would have priority over 
other bids or offers at the same price.
    If there is more than one highest bid for a Public Customer account 
or more than one lowest offer for a Public Customer account, then such 
bids or offers, respectively, would be ranked based on time priority.
    (B) FIQ Status. Next, orders and Quotes with Size in the 
Consolidated Book with FIQ status, as provided in proposed PCX rule 
6.76(a)(3), would have second priority over bids or offers at the same 
price, but only for up to 40% of the order against which the orders or 
Quotes with Size that have FIQ status would be executed.
    (C) LMM Guaranteed Participation. Bids and offers in the 
Consolidated Book for the account of the LMM would have third priority 
if the LMM is eligible to receive guaranteed participation on such bid 
or offer pursuant to PCX rule 6.82. LMMs would not receive any portion 
of an inbound order if their bids or offers were not at the trade 
price. The LMM's guaranteed participation would be expressed as a 
percentage of the remaining quantity after all Public Customer orders 
and quotes with FIQ status (to the extent of their 40% participation), 
if any, have first been executed. The LMM would not be allocated a 
number of contracts greater than the size of the LMM's bid or offer. If 
the LMM receives guaranteed participation on a trade and there are 
contracts remaining to be executed, the remaining portion of the LMM's 
bid or offer would be permitted to participate in the ``size pro rata'' 
allocation, as provided in proposed PCX rule 6.76(a)(4).
    (D) Non-Customer Orders and Quotes with Size. Orders and Quotes 
with Size in the Consolidated Book for the accounts of non-customers 
(including Firms and Market Makers) would have last priority. If there 
is more than one highest bid or more than one lowest offer in the 
Consolidated Book for the account of a non-customer, then such bids or 
offers would be afforded priority on a ``size pro rata'' basis, as 
provided in proposed PCX rule 6.76(a)(4).
xiii. FIQ Status
    The Exchange believes that PCX Plus is designed to reward market 
participants for quoting at the best price with size. The Exchange 
further believes that PCX Plus encourages quote competition in the 
Exchange's marketplace at all times--not just upon the entry of an 
order into the PCX market. Accordingly, the Exchange proposes to adopt 
new PCX rule 6.76(a)(3), which directly rewards market participants for 
improving the PCX quote by allocating to them a significant portion of 
inbound orders.
    Proposed PCX Rule 6.76(a)(3)(A)--This proposed rule change states 
that a non-customer order \17\ or Quote with Size that improves the 
best bid or offer on the Exchange and that is disseminated via OPRA 
would have ``FIQ status'' with respect to other bids or offers at the 
same price, unless it has been matched or further improved within three 
seconds. If it were matched within three seconds, then no FIQ status 
would apply to that order or quote. If it is improved, then the order 
or Quote with Size that improved the previous price would have priority 
and would itself receive FIQ status. If a market participant increases 
the size of a quote with FIQ status, the additional quantity would not 
be afforded FIQ status. If a market participant decreases the size of a 
quote with FIQ status, that revised quote would retain FIQ status. For 
purposes of this PCX rule, orders and Quotes with Size may be matched 
or improved only through an electronic interface device.
---------------------------------------------------------------------------

    \17\ The Exchange represents that, under the proposed priority 
rules, customer orders would always have priority and precedence 
over non-customer orders and Quotes with Size at the same price. The 
Exchange further represents that FIQ status would not apply to 
customer orders.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.76(a)(3)(B)--This proposed rule change sets 
forth the order allocation process for participants with FIQ status, as 
follows.
    (i) Once the available Public Customer interest in the Consolidated 
Book has been filled, an order or Quote with Size that has FIQ status 
would be entitled to trade against the greater of:
    (a) 40% of the next inbound electronic order or orders to buy or 
sell the same series; or
    (b) The total size to which the order or Quote with Size with FIQ 
status would receive pursuant to a size pro rata allocation.
    The 40% allocation would be applied to the quantity remaining after 
all Public Customer orders have first been executed. In addition, an 
order or Quote with Size with FIQ status would not be allocated a 
number of contracts greater than the size of the bid or offer with FIQ 
status.
    (ii) An order or Quote with Size would continue to maintain FIQ 
status until either:
    (a) The entire commitment size has been filled by the execution of 
a single inbound order;
    (b) A portion of the commitment size has been filled by the 
execution of a single inbound order and the number of contracts 
executed based on the

[[Page 69587]]

applicable allocation method as set forth in subsection (B)(i) of 
proposed PCX rule is at least 20 contracts (e.g., FIQ status for 100 
contracts would no longer apply once a Market Maker has been allocated 
40 contracts based on an allocation of 40% of a single 100-contract 
order); or
    (c) A portion of the commitment size has been filled by the 
execution of multiple inbound orders and the aggregate number of 
contracts allocated as a result of such executions equals or exceeds 20 
contracts (e.g., FIQ status for 100 contracts would no longer apply 
once a Market Maker has been allocated a total of 24 contracts based on 
three subsequent allocations of 8 contracts, each of which are based on 
allocations of 40% of 20 contracts).
    Proposed PCX Rule 6.76(a)(3)(C)--An LMM's Quote with Size with FIQ 
status would be entitled to an allocation representing the greater of: 
(i) The number of contracts to which the LMM would be entitled as 
guaranteed participation pursuant to subsection (a)(2)(C) of proposed 
PCX rule 6.76; or (ii) the number of contracts to which the LMM would 
be entitled for having FIQ status.
    Proposed PCX Rule 6.76(a)(3)(D)--This proposed rule change states 
that if a non-customer order or Quote with Size has FIQ status but a 
Public Customer order on the same side of the market is later entered 
with a price matching that non-customer's order or Quote with Size, the 
Public Customer order would gain priority over the non-customer's order 
or Quote with Size. In such circumstances, inbound orders would be 
allocated as follows: (i) The customer order would first be executed up 
to its designated size; and (ii) the non-customer order or Quote with 
Size with FIQ status would then be eligible to participate in the 
balance of the order.
xiv. Size Pro Rata Allocation
    The Exchange believes that another incentive for market 
participants to show their best prices and deepest markets at all times 
is the ``size pro rata'' allocation method. Under this method, the 
greater the size of a member's market, the greater the share of an 
order that the member would be allocated. This proposed rule change 
explains the manner in which orders are allocated pursuant to this 
formula. This proposed rule change would apply to issues traded under 
PCX Plus. Issues not traded under PCX Plus and orders allocated 
manually in the trading crowd would be subject to PCX rule 6.75, which 
PCX intends to delete once PCX Plus is rolled out for all issues.
    Proposed PCX Rule 6.76(a)(4)(A)--This proposed rule change sets 
forth the formula for orders that are subject to allocation on a ``size 
pro rata'' basis:
[GRAPHIC] [TIFF OMITTED] TN18NO02.029

    Under this formula, a participant's size pro rata allocation would 
be calculated as follows: The size of the order to be allocated is 
divided by the aggregated quote size. That result is then multiplied by 
the participant's quote size and the resulting number is the size pro 
rata allocation.
    For example, if there are 200 contracts to be allocated among three 
Market Makers quoting with the following sizes:

MM1..............................................................    100
MM2..............................................................    200
MM3..............................................................    500
                                                                  ------
  Aggregated Quote Size..........................................    800
 
MM1 receives (200/800) x (100) = 25 contracts
MM2 receives (200/800) x (200) = 50 contracts
MM3 receives (200/800) x (500) = 125 contracts
 

    Proposed PCX Rule 6.76(a)(4)(B)--This proposed rule change provides 
that the pro rata share allocated to each participant in the pool would 
be rounded down to a whole number, if applicable. If there are residual 
contracts to be filled after the pro rata calculation has been 
completed, such contracts would be allocated, with no more than one 
contract per participant, in the following sequence:
    (i) The participant in the pool who has the largest fractional 
amount (based on the pro rata calculation) would receive the first 
contract, and each successive contract (if any) would be allocated to 
each subsequent participant who has the next largest fractional share.
    (ii) If the last residual contracts are to be allocated between two 
or more participants having the same fractional amount, then the 
participant with the largest initial quote size in the pro rata pool 
would be allocated the next contract. Each successive contract (if any) 
would be allocated in the same manner.
    (iii) If the last residual contracts are to be allocated between 
two or more participants with the same fractional amount and initial 
quote size, then the participant with the first time priority in the 
pro rata pool would be allocated the next contract. Each successive 
contract (if any) would be allocated in the same manner.
xv. PCX Plus Executions
    The PCX's POETS system currently executes incoming orders 
automatically in two ways. First, if an inbound order is a market or 
marketable limit order and there is an order in the PCX order book to 
trade at the same price, the two orders would execute against each 
other. Second, if there were no order with priority in the PCX order 
book at the appropriate price (or there is an insufficient number of 
contracts at that price), then the incoming order (or a portion of it) 
would execute against the accounts of Market Makers who are logged onto 
the Auto-Ex ``wheel.'' \18\ Under the proposal, the Auto-Ex ``wheel'' 
would be phased out so that under PCX Plus, an incoming order would be 
instantaneously matched against trading interest in the Consolidated 
Book.
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 27633 (January 18, 
1990), 55 FR 2466 (January 24, 2002) (order approving POETS system); 
see also Securities Exchange Act Release No. 44847 (September 24, 
2001), 66 FR 50237 (October 2, 2001) (order granting accelerated 
approval to PCX's Auto-Ex Incentive Program).
---------------------------------------------------------------------------

    Proposed PCX Rule 6.76(b)--This proposed rule change addresses 
situations in which orders or Quotes with Size are executed through PCX 
Plus.
    Proposed PCX Rule 6.76(b)(1)--This proposed rule change states that 
an inbound order that is marketable would be immediately executed 
against bids and offers in the Consolidated Book unless one of the 
following conditions applies:
    (A) The size of the inbound order exceeds the Maximum Order Size 
established pursuant to rule 6.76; or
    (B) The inbound order is for the account of a Firm or Non-Member 
Market Maker and more than 50% of the aggregate trading interest in the 
Consolidated Book at the execution price is for the account (or 
accounts) of Public Customers.
    If the conditions specified in subsections (A) or (B) apply, the 
order

[[Page 69588]]

would be represented in the trading crowd pursuant to proposed PCX rule 
6.76(d).
    Proposed PCX Rule 6.76(b)(2)--The Exchange proposes to eliminate 
some of the Exchange's current system limitations regarding the 
automatic execution of incoming customer orders. Currently, if an 
incoming customer order cannot be filled in its entirety because of the 
maximum automatic execution size threshold, then the entire inbound 
order is routed to a Floor Broker Hand Held Terminal for representation 
in the trading crowd. The proposed rule change provides for partial 
electronic execution of an order before routing to a Floor Broker Hand 
Held Terminal or to the new Consolidated Book, as applicable. This 
proposed rule change provides that an inbound order would be either 
fully or partially executed based on the following procedures:
    (A) If more than 40% of the size in the Consolidated Book is 
comprised of a single Firm or Non-Member Market Maker order at the 
price at which the inbound order would trade, and such Firm or Non-
Member Market Maker order was entered less than one minute before the 
inbound order the inbound order would be processed as follows:
    (i) The inbound order would first be matched against all available 
Public Customer interest in the Consolidated Book;
    (ii) The inbound order, if not entirely filled, would then satisfy 
any available interest based on FIQ status and LMM guaranteed 
participation pursuant to proposed PCX rule 6.76(a);
    (iii) The inbound order, if not entirely filled, would then match, 
on a size pro rata basis, with the interest of the Market Makers, Firms 
and Non-Member Market Makers in the Consolidated Book; provided that 
the size pro rata share interest of each individual Firm and each Non-
Member Market Maker would be limited to 40% of the size of the 
remaining inbound order; and
    (iv) The balance of the order, if any, would then be routed to a 
Floor Broker Hand Held Terminal.
    (B) If the same conditions set forth in subsection (b)(2)(A) apply 
but the Firm or Non-Member Market Maker order was entered more than one 
minute before the inbound order, then:
    (i) The inbound order would first be matched against all available 
Public Customer interest in the Consolidated Book;
    (ii) The inbound order, if not entirely filled, would then satisfy 
any available interest based on FIQ status and LMM guaranteed 
participation pursuant to proposed PCX rule 6.76(a);
    (iii) The inbound order, if not entirely filled, would then match, 
on a size pro rata basis, with the interest of the Market Makers, Firms 
and Non-Member Market Makers in the Consolidated Book; provided that 
the size pro rata share interest of each individual Firm and each Non-
Member Market Maker would be limited to 40% of the size of the 
remaining inbound order;
    (iv) The inbound order, if not entirely filled, would then match, 
on a size pro rata basis, with all other remaining volume in the 
Consolidated Book of Firms and Non-Member Market Makers who were 
previously limited to 40%; and
    (v) The balance of the order, if any, would then be either:
    (a) Routed to a Floor Broker Hand Held Terminal in the case where 
the order locks or crosses the national best bid or offer (``NBBO''); 
or
    (b) Executed at the next available price level based on split-price 
execution.
    If neither of the conditions specified in subsection (a) or (b) 
apply, and the order is no longer marketable, then such order would be 
represented in the Consolidated Book.
xvi. Split-Price Executions
    Proposed PCX Rule 6.76(b)(3)--This proposed rule change governs the 
manner in which inbound electronic orders would be subject to split-
price executions. An inbound electronic order would receive an 
execution at multiple prices if there were some, but insufficient, 
trading interest at a price and the remainder of the order can be 
filled at one (or more) other prices based on available trading 
interest in the Consolidated Book. Orders would not be executed at a 
price that trades through another market. The balance of the order, if 
any, would be represented in the Consolidated Book, provided that if 
such order locks or crosses the NBBO, then the order would be routed to 
a Floor Broker Hand Held Terminal. Proposed subsection (b)(3) of PCX 
rule 6.76 would not apply to orders that are executed pursuant to 
proposed PCX rule 6.769(b)(2)(A) or Quotes with Size that are executed 
pursuant to proposed PCX rule 6.76(b)(4).\19\
---------------------------------------------------------------------------

    \19\ Proposed PCX rule 6.76(b)(3) is applicable to order 
execution and describes how individual orders will interact with the 
Consolidated Book at multiple price levels. Proposed PCX rule 
6.76(b)(4) describes how Quotes with Size interact at different 
price levels based on a size pro rata allocation after trading at 
the initial price.
---------------------------------------------------------------------------

xvii. Electronic Book Execution
    Currently, a Member on the Options Floor may trade against orders 
in the Consolidated Book by vocalizing a bid or offer and consummating 
a transaction with the Order Book Official.\20\ Under the proposal, 
Members would be permitted to execute trades electronically with orders 
in the Consolidated Book as provided in proposed PCX rule 6.76(b)(4).
---------------------------------------------------------------------------

    \20\ See generally PCX rules 6.51--6.58.
---------------------------------------------------------------------------

    Proposed PCX Rule 6.76(b)(4)--This proposed rule change addresses 
situations in which Market Makers interact electronically with orders 
in the Consolidated Book. When a Quote with Size initiates a trade with 
the Consolidated Book (the ``initiating Quote with Size''), an 
Electronic Book Execution would occur as follows:
    (A) The initiating Quote with Size would immediately execute 
against the Consolidated Book if the percentage of the transaction 
involving Public Customer interest (as represented in the Consolidated 
Book) would comprise no more than 40% of the transaction (e.g., if the 
initiating Quote with Size is for 20 contracts and the size in the 
Consolidated Book at the execution price is 50 contracts, six contracts 
of which are the Public Customer interest (6 / 20 = 30%), then the 
initiating Quote with Size for 20 contracts would be executed in 
full)).
    (B) If the initiating Quote with Size would effect a transaction 
against the Consolidated Book and the percentage of the transaction 
involving Public Customer interest would comprise more than 40% of the 
transaction, then the initiating Quote with Size would be processed as 
follows:
    (i) The Market Maker's initiating Quote with Size would receive an 
execution comprising the greater of:
    (a) 40% of the Public Customer interest in the Consolidated Book at 
that price; or
    (b) The total size to which the inbound initiating Quote with Size 
would receive pursuant to a size pro rata allocation.
    (ii) The balance of the Consolidated Book at that price would be 
displayed for three seconds (via a System Alert Message--SAM) to all 
Crowd Participants.
    (iii) The balance of the Public Customer interest in the 
Consolidated Book would then be allocated on size pro rata basis to all 
Crowd Participants, if any, who have entered bids or offers to trade at 
the execution price within the three seconds provided.
    (iv) After the Public Customer interest has been allocated, the 
initiating Quote with Size would match against all remaining interest 
in the Consolidated Book. If the initiating Quote with Size

[[Page 69589]]

does not fill the Consolidated Book, then all Crowd Participants would 
be matched on a size pro rata basis with the remaining interest in the 
Consolidated Book at that price.
    (v) If the remaining Quotes with Size are executable at the next 
price level, they would be matched against the Consolidated Book on a 
size pro rata basis.
xviii. NBBO Step-Up
    The Exchange currently uses NBBO Step-Up functionality in 
designated option issues pursuant to PCX rule 6.87(i). PCX rule 6.87(i) 
permits members on the Auto-Ex system who are quoting at a price 
inferior to the NBBO, to step-up to the NBBO price in executing 
incoming orders. This proposal would modify this feature as set forth 
below. PCX rule 6.87(i) would continue to apply to orders in issues not 
designated for PCX Plus (during the phase-in period).
    Proposed PCX Rule 6.76(b)(5)(A)--This proposed rule change states 
that the LMM in an issue may Step-Up and execute inbound orders at the 
NBBO price when the NBBO is better than the PCX's disseminated quote. 
Subject to the approval of two Floor Officials,\21\ the LMM would have 
sole discretion to determine whether the NBBO Step-Up feature:
---------------------------------------------------------------------------

    \21\ A proposed rule change to current PCX rule 6.87(i) to grant 
two Floor Officials, rather than the Options Floor Trading 
Committee, the supervisory authority over the NBBO Step-Up feature 
is pending Commission approval. See file no. SR-PCX-2002-09.
---------------------------------------------------------------------------

    (i) Would be engaged or disengaged;
    (ii) Would be set to execute inbound orders when the NBBO is 
crossed or locked; and
    (iii) Would be set to execute inbound orders at prices that are one 
or more trading increments better than the LMM's best bid or offer.
    Proposed PCX Rule 6.76(b)(5)(B)--Under this proposed rule change, 
LMMs using the NBBO Step-Up feature may, at their discretion, 
disseminate Quotes with Size at the NBBO price when the NBBO price is 
better than the LMM's own disseminated price. If the LMM chooses to do 
so, then quotes at the NBBO would be disseminated via OPRA on the LMM's 
behalf. Such quotes would include the aggregate quotation size of the 
LMM and any SMMs who choose to participate in the NBBO Step-Up feature. 
LMMs may not use the NBBO Step-Up feature to match quotations of other 
PCX participants who are quoting at the NBBO. Accordingly, if another 
PCX participant enters an order or Quote with Size at the NBBO, then 
the LMM's original quote would prevail and the LMM's NBBO Step-Up quote 
would be removed from the PCX Plus system. The Exchange proposes to 
surveil for quoting abuses by its Members.
    Proposed PCX Rule 6.76(b)(5)(C)--This proposed rule change states 
that inbound orders executed based on NBBO Step-Up would be allocated 
to SMMs who choose to participate in the NBBO Step-Up feature and the 
LMM on a size pro rata basis.
xviv. Crossing Orders
    Under proposed PCX rule 6.76(c), PCX Plus would permit the 
execution of a ``Cross Order'', which is defined as two orders with 
instructions to match the identified buy-side with the identified sell-
side at a specified price (``Cross Price''). The proposed rule 
establishes a crossing mechanism that automates the process that occurs 
on the Options Floor currently by which a Floor Broker may facilitate 
orders or cross two orders, regardless of size, via public outcry. The 
Exchange believes that this new mechanism, in conjunction with the 
order execution algorithm as described earlier, would foster 
competition and enhance market efficiency and fairness by offering 
incentives to all market participants that provide liquidity. The 
Exchange believes that the proposed crossing mechanism strikes a 
balance between allowing members to interact with their customer orders 
that they bring to the market, and providing Market Makers and other 
market participants with a fair opportunity and incentive to compete on 
an equal basis with such orders brought to the Exchange. The process in 
which a Cross Order is matched for execution is described below.
    Proposed PCX Rule 6.76(c)(1)--For purposes of proposed PCX rule 
6.76(c), the following terms would have the meanings specified below:
    (A) ``Cross Order'' means two orders with instructions to match the 
identified buy-side with the identified sell-side at the Cross Price.
    (B) ``Facilitation Order'' means an order as defined in PCX rule 
6.47(b).
    (C) ``PCX Broker'' means a Member, Member Organization or 
Associated Person who enters orders as agent for accounts other than 
for Market Makers.
    (D) ``Exposed Order'' means the buy or sell side of a Cross Order 
that has been designated by a PCX Broker as the side to be exposed to 
the market and that is eligible for execution against all trading 
interest. Public Customer orders would always be deemed to be the 
Exposed Order in a Cross Order. In the case of a Cross Order involving 
a non-customer on both the buy side and sell side, the PCX Broker must 
designate one side of the Cross Order as the Exposed Order.
    (E) ``Shadow Order'' means an order that is submitted by a PCX 
Broker to buy or sell a stated number of contracts at a specified price 
and that is to be executed in whole or in part against an Exposed 
Order. Any unexecuted portion of a Shadow Order would be canceled.
    Proposed PCX Rule 6.76(c)(2)--This proposed rule change sets forth 
the steps involved in the Crossing Mechanism, as follows:
    (A) A PCX Broker would be required to enter into PCX Plus the terms 
of each Cross Order to be executed electronically on the Exchange. The 
required terms include the terms of the order for a Public Customer or 
a broker-dealer and the proposed Facilitation Order (or two orders to 
be crossed neither one of which is a Facilitation Order (``non-
facilitation cross'')), the proposed crossing price, the quantity of 
the order that the PCX Broker is willing to facilitate (in case of a 
facilitation cross), and an indication of which order is the Exposed 
Order. If the proposed Cross Price were outside the BBO at the time of 
order entry, PCX Plus would reject the Cross Order.
    (B) After accepting the Cross Order, PCX Plus would execute the 
Cross Order in the following sequence.
    (i) If the Cross Price is between the BBO:
    (a) PCX Plus would immediately display the Exposed Order's price 
and quantity for 30 seconds. During the 30-second exposure period, 
there would be no indication that the order is part of an impending 
cross. PCX Plus places the Shadow Order on hold and such order is not 
visible except to the PCX Broker that entered the Cross Order.
    (b) As long as the Exposed Order is the highest priority order at 
the best price, other Members and Member Organizations may trade 
against the Exposed Order during the exposure period. If at any time 
during the exposure period, the Exposed Order were entirely filled, PCX 
Plus would cancel the remaining quantity of the Shadow Order and send 
the PCX Broker a message that the crossing transaction has been 
completed.
    (c) At the end of the exposure period, if the Exposed Order has not 
been entirely filled, but it is at the best price and has the highest 
priority, then PCX Plus would execute the remainder of the order 
against the Shadow Order. PCX Plus would then cancel the remainder of 
the Shadow Order and send the crossing firm a message that the crossing 
transaction has been completed.

[[Page 69590]]

    (d) At the end of the exposure period, if the Exposed Order has 
quantity remaining and it is not the highest priority order at the 
market, then PCX Plus would automatically cancel the remainder of the 
Exposed Order and the Shadow Order and would send the PCX Broker a 
message that the crossing transaction has been completed.
    (ii) If the Cross Price is at the BBO:
    (a) The Exposed Order would be matched at the displayed price 
against all pre-existing trading interest in the Consolidated Book with 
priority in accordance with proposed rule 6.76(a).
    (b) The remainder of the Exposed Order, if any, would be exposed at 
the limit price for 30 seconds. As long as the Exposed Order has the 
highest priority at the best price, other Members and Member 
Organization may trade against the Exposed Order during the 30-second 
exposure period. If at any time during the exposure period, the Exposed 
Order were entirely filled, PCX Plus would cancel the remaining 
quantity of the Shadow Order and send the PCX Broker a message that the 
crossing transaction has been completed.
    (c) At the end of the exposure period, if the Exposed Order has not 
been entirely filled, but it is at the best price and has the highest 
priority, then PCX Plus would execute the remainder of the order 
against the Shadow Order. PCX Plus would then cancel the remainder of 
the Shadow Order and send the crossing firm a message that the crossing 
transaction has been completed.
    (d) At the end of the exposure period, if the Exposed Order has 
quantity remaining and it is not the highest priority order at the 
market, then PCX Plus would automatically cancel the remainder of the 
Exposed Order and the Shadow Order and would send the PCX Broker a 
message that the crossing transaction has been completed.
    Proposed PCX Rule 6.76(c)(3)--This proposed rule change sets forth 
certain prohibited conduct related to Crossing Orders. The proposed 
rule change, as described below, is designed to place limitations on 
the internalization of order flow and to provide added opportunities 
for competition. Under the proposed rule change, it would be a 
violation of proposed PCX rule 6.76(c) for a PCX Broker to be a party 
to any arrangement designed to circumvent this PCX rule by providing an 
opportunity for a customer or a broker-dealer to execute against agency 
orders handled by the PCX Broker immediately upon their entry into PCX 
Plus.
    In addition, PCX Brokers would not be permitted to execute as 
principal orders they represent as agent unless: (i) Agency orders are 
first exposed on the Exchange for at least 30 seconds; (ii) the PCX 
Broker utilizes the Crossing Mechanism pursuant to proposed PCX rule 
6.76(c)(2); or (iii) the PCX Broker executes the orders pursuant to PCX 
rule 6.47.
xx. Orders Executed Manually
    The Exchange represents that, to effectively combine the benefits 
of open outcry trading with those of PCX Plus, it has defined specific 
priority rules for handling manual executions in the trading crowd.
    Proposed PCX Rule 6.76(d)(1)--This proposed rule change provides 
that Floor Brokers manually representing orders in the trading crowd 
must comply with the order execution and priority principles set forth 
in PCX rule 6.75 and, in addition, with the following provisions 
establishing priority for bids and offers by account type:
    (A) Public Customer orders in the Consolidated Book have first 
priority. Multiple customer orders at the same price are ranked based 
on time priority.
    (B) Bids and offers of the members of the trading crowd have second 
priority. These bids and offers include those made by Market Makers and 
Floor Brokers (on behalf of customer and broker-dealer orders they are 
representing).
    (C) Bids and Offers of broker-dealers (including Quotes with Size 
and orders of Market Makers) in the Consolidated Book have last 
priority. Multiple bids and offers of broker-dealers would be executed 
on a size pro rata basis pursuant to proposed PCX rule 6.76(a).
    Proposed PCX Rule 6.76(d)(1), Commentary .01--This proposed 
commentary states that the provisions of proposed PCX rule 6.90 would 
apply to transactions automatically executed pursuant to proposed PCX 
rule 6.76(b).
xxi. Cabinet Trades
    The Exchange's rules for cabinet trading are currently set forth in 
PCX rule 6.80. The Exchange proposes to retain this PCX rule 
(renumbered as proposed PCX rule 6.80(b)) and to apply it to issues not 
traded under PCX Plus during the phase-in period. During that time, 
proposed PCX rule 6.80(c) would govern cabinet trading applicable to 
all issues traded on PCX Plus.
    Proposed PCX Rule 6.80(a)--This proposed rule change states that 
the Exchange would designate option issues that are eligible for 
cabinet trading pursuant to this PCX rule. If an option issue has not 
been designated as eligible for cabinet trading on PCX Plus, the 
provisions of proposed PCX rule 6.80(b) would apply. If an option issue 
has been designated as eligible for cabinet trading on PCX Plus, then 
the provisions of subsection (c) would apply.
    Proposed PCX Rule 6.80(b)--This proposed rule change sets forth the 
manner in which cabinet trading would be conducted in option issues not 
traded on PCX Plus during the phase-in period. Except for minor changes 
in terminology and references, the proposed rule is substantially the 
same as the existing rule.
    Proposed PCX Rule 6.80(c)--The following provisions of proposed 
subsection (c) would apply to option issues designated for cabinet 
trading on PCX Plus:
    (1) Cabinet trading under the following terms and conditions would 
be available in each series of option contracts open for trading on the 
Exchange.
    (2) Trading shall be conducted in accordance with other Exchange 
Rules except as otherwise provided herein.
    (3) Limit orders at a price of $1 per option contract must be 
placed on the Exchange in such form and manner as may be prescribed by 
the Exchange.
    (4) Orders for cabinet trading may be placed for the accounts of 
Public Customers, Firms, and Market Makers, with priority based upon 
the sequence in which such orders are placed on the Exchange.
    (5) Market Makers shall not be subject to the requirements of rule 
6.37 for orders placed pursuant to this PCX Rule.
    (6) Members submitting opening orders priced at $1 per option 
contract must comply with the order entry procedures and format 
requirements as may be prescribed by the Exchange. Opening orders 
priced at $1 per option contract may be placed on the Exchange for 
execution only to the extent that the order book in cabinet trades 
contains unexecuted contract closing orders with which the opening 
orders immediately may be matched.
xxii. Clarification of LMM Definition
    Proposed PCX Rule 6.82(a)(1)--This proposed rule change defines LMM 
and provides that RMMs are not eligible to act as LMMs from a location 
off the trading floor.
xxiii. Firm Quote Rule
    Proposed PCX Rule 6.86(a)(2)--This proposed rule change clarifies 
the application of the Exchange's Firm Quote rule for option issues 
traded on PCX Plus. Specifically, LMMs and any registered Market Makers 
who are quoting at the disseminated bid or offering price and who are 
constituting the trading crowd in such option series

[[Page 69591]]

would collectively be the Responsible Broker or Dealer to the extent of 
the sizes of their respective bids and offers. For option issues not 
designated for trading on PCX Plus, the LMM and any registered Market 
Makers constituting the trading crowd in a particular option series 
would collectively be the Responsible Broker or Dealer to the extent of 
the aggregate quotation size specified.
xxiv. PCX Plus
    The Exchange represents that proposed new PCX Rule 6.90, which 
describes the operational requirements of PCX Plus,\22\ is 
substantially similar to current PCX rule 6.87 relating to the 
Exchange's Auto-Ex system, except for:
---------------------------------------------------------------------------

    \22\ PCX Plus is defined in proposed PCX rule 6.90(a) as the 
Exchange's electronic order delivery, execution and reporting system 
for designated option issues through which orders and Quotes with 
Size of members are consolidated for execution and/or display. This 
trading system includes the electronic communications network that 
enables registered Market Makers to enter orders/Quotes with Size 
and execute transactions from remote locations or the Trading Floor.
---------------------------------------------------------------------------

    (1) Stylistic and minor conforming word changes made to reflect the 
new market structure; and
    (2) The omission of rules relating to Eligible Orders, Order Entry 
Firm Registration, Market Maker Requirements and Eligibility, Market 
Maker Restrictions on Redirecting Auto-Ex Trades, Price Adjustments, 
the Auto-Ex Incentive Program, the Auto-Ex Book functions, and the 
Auto-Ex Between-the Quotes (current PCX rules 6.87(a), 6.87(c)(1), 
6.87(e), 6.87(f), 6.87(g), 6.87(k), 6.87(l), and 6.87(m), respectively) 
\23\ because these provisions are not applicable to PCX Plus.
---------------------------------------------------------------------------

    \23\ The manner in which orders will be subject to split-price 
executions in PCX Plus are set forth in proposed PCX rule 
6.76(b)(3), which have been adapted from current PCX rule 6.87(p).
---------------------------------------------------------------------------

    As stated earlier, during the phase-in period, the Exchange would 
designate option issues that are eligible for trading on PCX Plus. If 
an option issue has not been designated as eligible for execution on 
PCX Plus pursuant to this PCX rule, the provisions of PCX rule 6.87 
would continue to apply.
    The following provisions of PCX rule 6.87 are being incorporated 
into proposed PCX rule 6.90:
    Proposed PCX Rule 6.90(c)--PCX proposes to adopt the following 
definitions from current PCX rule 6.87(a).
    (1) The term ``User'' means any person or broker-dealer that 
obtains electronic access to PCX Plus through an Order Entry Firm.
    (2) The term ``Order Entry Firm'' means a member organization of 
the Exchange that is able to route orders to the Exchange.
    Proposed PCX Rule 6.90(d)--This proposed rule change, which sets 
forth the obligations of Order Entry Firms regarding the proper use of 
PCX Plus, has been adapted from current PCX rule 6.87(c). Order Entry 
Firms would be required to: comply with all applicable PCX options 
trading rules and procedures; provide written notice to all Users 
regarding the proper use of PCX Plus; and maintain adequate procedures 
and controls that would permit the Order Entry Firm to effectively 
monitor and supervise the entry of electronic orders by all Users.
    Proposed PCX Rule 6.90(e)--This proposed rule change has been 
adapted from current PCX rule 6.87(d) and codifies what practices are 
prohibited on PCX Plus. Except for minor changes in terminology, the 
proposed rule is substantially similar to the existing rule.
    Proposed PCX Rule 6.90(g)--Proposed PCX rule 6.90(g) includes 
provisions regarding the suspension of the PCX Plus system in the event 
of any disruption or malfunction in the use or operation of system, as 
well as any other unusual market conditions not involving a system 
malfunction. This proposed rule change has been adapted from current 
PCX rule 6.87(h). Under this proposed rule change, if a PCX Plus system 
disruption or malfunction occurs but the Exchange is able to process 
and disseminate quotes accurately, then any orders received by the 
Exchange would be routed to Floor Broker Hand Held Terminals for 
representation in the trading crowd. Regular trading procedures would 
be resumed by the Exchange when two Floor Officials determine that the 
disruption or malfunction is corrected. If there are other unusual 
market conditions not involving a PCX Plus system disruption or 
malfunction, two Floor Officials may suspend the PCX Plus system in 
accordance with PCX rule 6.28. Whenever such action is taken, any 
orders received by the Exchange would be routed to Floor Broker Hand 
Held Terminals for representation in the trading crowd.
    Proposed PCX Rule 6.90(h)--Under this proposed rule change, the 
Options Floor Trading Committee may designate, for an option issue, 
that an order would default for manual representation in the trading 
crowd if the NBBO is crossed or locked. Proposed PCX rule 6.90(h) has 
been adapted from current PCX rule 6.87(j).
xv. PCX Rule 10--Minor Rule Plan
    The Exchange proposes to amend PCX rule 10.13 to include violations 
of proposed PCX rule 6.37(g)(2) in the Minor Rule Plan. Proposed new 
PCX rule 6.37(g)(2) requires that each RMM provide continuous two-sided 
quotations in each issue in which they are appointed during 60% of all 
times during which the Exchange is open for options trading. This 
obligation would apply to all of the RMM's appointed issues 
collectively, rather than on an issue-by-issue basis. Compliance with 
this obligation would be determined on a per-calendar-quarter basis. 
The Exchange believes that the proposed fine schedule is consistent 
with the fines established for violations by a Market Maker involving 
the 75% primary appointment zone requirement and the 60% in-person 
trading requirement.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\24\ in general, and furthers 
the objectives of section 6(b)(5) of the Act,\25\ in particular, in 
that it is designed to facilitate transactions in securities; to 
prevent fraudulent and manipulative acts and practices; to promote just 
and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such

[[Page 69592]]

longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the PCX consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (A) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the PCX. All submissions should refer to File No. 
SR-PCX-2002-36 and should be submitted by December 9, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29170 Filed 11-15-02; 8:45 am]
BILLING CODE 8010-01-P